Speculators keep high oil prices in our futures

You wouldn't think oil and tulip bulbs would have much in common, would you? But then, as Fats Waller, jazz pianist and sometime philosopher, liked to say, "One never knows, do one?"

Back in the middle 1600s, Dutch florists and their financiers in the Netherlands were getting filthy rich every bit as fast as the oil barons of Exxon Mobil and other American petroleum giants of today. Tulips, not even native to the country, had become all the rage, prized for their beauty but also for the ravenous demand that developed for them and the millions in Dutch florins they could bring. Sound familiar?

The tulip was a turnpike to unheard-of wealth, much like oil today. In the early 1620s, a single tulip bulb, according to some accounts, could sell for several times the average annual income of the ordinary workman. The buying and selling were frenzied, inevitably attracting those jackals of the money-making dodge -- the speculators.

Some tulip bulbs were barely in the ground when they were sold for shipment at some later date in what today would be termed futures contracts. Some more risk-averse types even peddled bulbs that hadn't yet been planted or for which no planting plans were in place. It was a market in which any reasonable relationship between the price and the product vanished. It was, in short, a "bubble."

As a rule, economists aren't comfortable with assigning price surges like the spike in oil prices to a "bubble." They prefer to deal more with "fundamentals," like the effect of supply and demand. So do the obscenely overcompensated oil company executives who claimed before Congress this week to be as puzzled as the rest of us over why oil prices have rocketed up so far and so fast. They gotta be kidding!

There's no question the imbalance between supply and demand, aggravated by the explosion of the economies of India and China, is the root cause. But the fine, finagling hand of the speculator can be seen at work, too.

To hear its apologists tell it, you'd think the oil industry's suppliers and distributors got caught short by China's growth spurt and have had to scramble to adjust prices to match tight supply with an unexpectedly rising demand. But how could that be? China's economy has been on a tear for a decade, as has its oil demand.

Actually, China's growth rate has been slowing a bit this year. But that's not reflected in the price per barrel. As Robert Scott, senior international economist at the Economic Policy Institute in Washington, points out, the average price per barrel a year ago was $64 while currently it's $90 a barrel for immediate sale. And that prompts another question.

If oil is going on the immediate market for roughly $90 a barrel, why is the more widely quoted price something over $130 per barrel?

Enter the speculators -- the hedge fund types and investment bankers, the largely unregulated market players with a vested interest in higher oil prices and the bad times that come with them. We last heard from them, you'll recall, in the housing market that went belly up earlier this year. And before that, they played an equally destructive role in the dot.com, high-tech bust.

It sounds harsh to suggest that these "masters of the universe" have a stake in hard times for the rest of us. But the reality is that they're not tying up oil in $130-a-barrel futures contracts unless they expect to peddle the stuff for an ever-higher price down the road. They're betting on the spread. Moreover, their willingness to bet on bad times ahead contributes to a psychology that promotes more speculation and even higher prices.

It may not be in the national interest, but that's unregulated capitalism, the carnivorous kind that even Adam Smith warned against.

Scott said that he remembers the previous oil price explosions of the early and late 1970s and that this one will take longer to correct. It's not merely the new oil appetites of India and China; oil output, he notes, is declining in such major producers as Mexico, Iran, Venezuela and Iraq -- in the latter case because of the American invasion.

In addition, President Bush's hostile stance toward Iran -- and the fear it creates of a U.S. military attack on the country -- has fed uncertainty about the stability of the Middle East and its reliability as an oil supplier, Scott said.

The U.S. may have to look ahead to two or three more years of rising oil prices, Scott said. What makes it particularly painful, he said, is that the bubble in oil prices contributes to still another bubble -- food prices.

The speculation spree is likely to continue, Scott said. But eventually oil prices will stabilize, and when they do, some speculators will be left holding an overpriced barrel or two or 300 of oil. "Some speculators will lose money," he said.